Real estate purchasing power: how it changed over 20 years

Why real estate purchasing power matters for every buy or rent decision

Real estate purchasing power is the floor area you can buy or rent with a given budget, once you factor in prices, mortgage rates and, above all, annual inflation. Looking at its evolution over the last 20 years is essential to understand whether it’s smarter to buy or rent and to make the most of a simulator like buy-or-rent.net.

Between 2004 and 2024, households have faced:

• average inflation around 1.5–2 %/year over the long run, with peaks above 5 % in 2022–2023;
• mortgage rates dropping from 4–5 % to below 1 %, then climbing back to about 3.6 % in 2024;
• property prices that sometimes doubled in major cities;
• rents indexed to inflation (or rent indices), roughly tracking the cost of living.

The key question: how do these parameters, especially annual inflation, change your 20‑year buy or rent outcome?

1. Annual inflation: a core parameter in the simulator

In the buy-or-rent.net simulator, the inflation_annuelle parameter represents the average rise in prices across the economy. It affects:

• the erosion of the real value of your mortgage payments;
• the revaluation of rents over time;
• the evolution of side costs: property tax, service charges, renovation costs, home insurance;
• the real performance of your investments (investment rate – inflation).

Over 20 years, even a small difference in annual inflation (say 1.5 % vs 3 %) can significantly change the buy or rent comparison. That’s why the simulator lets you adjust this parameter instead of locking you into a single scenario.

1.1. Simple example: 2 % vs 4 % inflation over 20 years

Imagine a household paying a fixed mortgage payment of €1,200/month for 20 years.

• With 2 % inflation per year, the purchasing power of €1,200 in 20 years is roughly equivalent to €800 today.
• With 4 %, those €1,200 in 20 years are worth only about €545 in today’s money.

Simplified formula: real value = nominal payment / (1 + inflation)^years.
Example at 4 % over 20 years: 1,200 / (1.04^20) ≈ 1,200 / 2.19 ≈ €548.

Conclusion: the higher the annual inflation, the lighter your fixed mortgage payment becomes in real terms, while rent usually follows inflation. This is central to any buy or rent analysis.

2. 2004–2014: falling rates, rising prices, moderate inflation

Between 2004 and 2014, real estate purchasing power evolved in a mixed way:

• Loan rates: from 4–5 % in the early 2000s down towards 3 % or less;
• Annual inflation: typically around 1–2 %, with a few spikes;
• Property prices: +80 % to +150 % in some large cities;
• Rents: steady growth, broadly in line with inflation.

For a typical household, lower rates increased borrowing capacity, but strong price growth reduced the floor area they could buy. Over 20 years, moderate inflation slowly eroded the real cost of mortgage payments but also of rents.

2.1. Numerical example: 2004 vs 2014

Suppose a couple can allocate €1,000/month to housing.

• In 2004, with a 4.5 % rate over 20 years: borrowing capacity ≈ €160,000.
• In 2014, with 2.5 % over 20 years: capacity ≈ €190,000–200,000 for the same payment.

If, at the same time, the price per m² rises from €2,000 to €3,500:

• 2004: 160,000 / 2,000 = 80 m².
• 2014: 200,000 / 3,500 ≈ 57 m².

Real estate purchasing power in square metres dropped sharply despite better loan conditions. Already back then, the buy or rent balance depended on inflation and price growth assumptions.

3. 2014–2021: rock-bottom rates, low inflation, record prices

Between 2014 and 2021:

• Loan rates: sometimes below 1 % over 20 years;
• Annual inflation: often under 1.5 %;
• Property prices: renewed strong growth, especially in big cities;
• Rents: moderate increases, sometimes regulated.

For buy or rent calculations, this period was very favourable to borrowing: low inflation did not erode mortgage payments much, but ultra‑low rates allowed high borrowing capacity. The downside: very expensive entry tickets (price/m², closing costs, down payment).

3.1. Role of inflation on a 1 % mortgage

Imagine a €250,000 mortgage over 20 years at 1 %:

• Monthly payment excluding insurance ≈ €1,150;
• With 1 % annual inflation: the real value of €1,150 in 20 years ≈ €942 today;
• With 2 %: ≈ €772 in today’s euros.

With such low rates, the buy or rent decision hinged on:

• future price trends (further growth or stagnation);
• notary/closing fees (7–8 % on existing homes, 2–3 % on new build in some countries);
• agency or broker fees (often 3–5 % of price);
• the ability to handle property tax and its yearly revaluation.

On buy-or-rent.net, setting a realistic annual inflation already made it possible to compare buying with an alternative financial investment, using the investment rate parameter if you stayed a renter.

4. 2021–2024: inflation comeback and rate hikes

Since 2021, the landscape has shifted fast:

• Annual inflation: up to 5–6 % in some years;
• Loan rates: back up towards 3.5–4 % over 20 years (≈ 3.6 % in 2024);
• Prices: stabilising or edging down in some markets, but still high overall;
• Rents: revalued with inflation or rent indices, sometimes capped.

Real estate affordability is hit by higher rates, but inflation changes the long‑term logic:

• your mortgage payment is fixed in nominal terms but shrinks quickly in real terms with 4–5 % inflation;
• rents and property tax are regularly adjusted upward;
• your investments must beat inflation to preserve purchasing power (real return = investment rate – inflation).

4.1. Example: buying at 3.6 % vs renting in a high‑inflation world

Simple 20‑year scenario:

• Purchase price: €300,000 (existing property);
• Notary/closing fees: 8 % ⇒ €24,000;
• Down payment: €50,000;
• Mortgage: €274,000 at 3.6 % over 20 years;
• Monthly payment excluding insurance ≈ €1,610;
• Borrower insurance: 0.30 % rate ⇒ ≈ €69/month.

Total monthly cost ≈ €1,679.

Assume a comparable rental costs €1,250/month, with annual increases roughly tracking inflation.

Inflation scenarios:

• Scenario A: 2 %/year;
• Scenario B: 4 %/year.

On buy-or-rent.net, if you input these two annual inflation values, you’ll see:

• In Scenario A (2 %), the gap between rent and mortgage remains meaningful in real terms;
• In Scenario B (4 %), the €1,679 mortgage becomes much lighter in purchasing power over time, while rent climbs each year.

Depending on your assumed investment rate (say 4–5 % gross) for the money you keep invested as a renter, the buy or rent outcome shifts significantly. That’s why the inflation_annuelle parameter is so important.

5. Real estate purchasing power: don’t ignore hidden costs

Real estate purchasing power is not just about the mortgage payment. Over 20 years, annual inflation also affects all the side costs of ownership:

• Property tax: from a few hundred to several thousand euros per year depending on the city, with regular property tax revaluation;
• Renovation costs: routine maintenance plus energy upgrades (insulation, heating, DPE/energy label improvements);
• Home and building insurance: trending higher, partly due to rising repair costs;
• Closing/notary fees: paid upfront but must be included in long‑term returns;
• Prepayment penalties: if you repay early, up to 3 % of the remaining balance or 6 months of interest in many markets.

For renters, annual inflation mainly hits:

• rent increases (indexation to inflation or rent indices);
• service charges passed on by the landlord;
• but also the real value of financial investments built with the monthly savings vs owning.

5.1. Example: inflation and property tax

Assume property tax starts at €1,200/year, with an average revaluation of 3 %/year and annual inflation also at 3 %.

• In nominal terms, it grows to about €2,170 after 20 years (1,200 × 1.03^20).
• In real terms (after adjusting for 3 % inflation), it is roughly flat.

If property tax rises faster than inflation (say 4 % vs 2 %), its real burden increases over time. That’s a crucial input when comparing buy or rent outcomes.

6. Buy or rent: the combined impact of inflation and investments

The buy-or-rent.net simulator also asks for an investment rate for the money you could invest if you stay a renter (ETFs, savings accounts, bonds, etc.). The key is not just the nominal return, but your real return after inflation.

6.1. Example: 4 % investment return with 3 % inflation

If you rent and invest €400/month for 20 years at 4 %/year, you end up with roughly:

• Nominal capital ≈ €146,000;
• With 3 % annual inflation, real value closer to €81,000–85,000 in today’s money.

Meanwhile, if you buy, you need to compare:

• the net value of your home (future price – remaining mortgage – selling costs);
• minus the impact of inflation on that amount in constant euros.

A well‑configured buy or rent simulation, with realistic inflation_annuelle and investment rate values, helps you quantify these trade‑offs.

7. Practical scenarios: how inflation can flip the verdict

7.1. Scenario 1: low inflation and strong investments

Assumptions:

• Annual inflation: 1.5 %;
• Loan rate: 3.6 %;
• Investment rate: 5 %;
• Flat or slightly declining property prices.

Here, renting and investing the difference between rent and mortgage can be attractive because:

• your investments clearly beat inflation;
• the real burden of mortgage payments falls slowly;
• property appreciation is modest.

But this is not a universal rule: results depend on amounts, location (property tax, prices, rents), duration of stay and your personal situation.

7.2. Scenario 2: high inflation and average investments

Assumptions:

• Annual inflation: 4 %;
• Loan rate: 3.6 %;
• Investment rate: 4 %;
• Property prices roughly tracking inflation.

In this context, buying with a fixed‑rate mortgage is relatively protected by inflation:

• your monthly payment shrinks quickly in real terms;
• the home’s value keeps up (at least partly) with the general price level;
• your financial investments barely outpace inflation.

Again, there is no one‑size‑fits‑all answer: notary fees, property tax, renovation costs, time horizon and mobility all matter. A personalised buy or rent calculation is essential.

8. How to set annual inflation properly in the simulator

To use the inflation_annuelle parameter effectively in your buy or rent analysis:

• Don’t just plug in today’s inflation (e.g. 4–5 %): think in terms of a 20‑year average (maybe 2–3 %).
• Test multiple scenarios: 1.5 %, 2.5 %, 3.5 % to see how sensitive the result is.
• Align other assumptions: rent increases, property tax revaluation, service charge growth should be consistent with your inflation view.
• Adjust the investment rate: a 4 % investment in a 1 % inflation world is very different from 4 % in a 3.5 % inflation world.

This will not replace tailored professional advice, but it provides a quantified framework to think about whether to buy or rent.

9. Conclusion: over 20 years, inflation can tip the buy or rent balance

Over the last two decades, real estate purchasing power has been reshaped by the mix of:

• mortgage rates (currently around 3.6 % in many markets);
• annual inflation (1–2 % before 2020, much higher since);
• rising prices, rents and property taxes;
• the real (after‑inflation) yield of financial investments.

Depending on the inflation level you assume, the buy or rent calculation can lead to very different outcomes. Low inflation often favours renting plus strong investments; high inflation tends to favour fixed‑rate mortgages but also pushes up ownership costs (property tax, maintenance, insurance).

There is no universal answer: buy or rent depends on your personal situation (income, job stability, city, time horizon, risk tolerance, etc.). This article is for educational purposes only and does not constitute personalised financial advice.

To go further, tweak annual inflation and see its quantified impact over 20 years with all the other parameters (loan rate, investment rate, property tax, fees): Simulate your situation on buy-or-rent.net.